Standing Committee G

[Mrs. Irene Adams in the Chair]

Education Bill

Stephen Timms: On a point of order, Mrs. Adams. It has been drawn to my attention that I undersold my case to the Committee last Thursday. We discussed who should be liable for the employer's pension contributions where a school has earned autonomy. I have written to Committee Members about that, and I want to put on record that contrary to what I said on Thursday, the employer's pension contribution will be taken from the school's budget share. There is therefore no question of a school increasing an LEA's pension liability after earning greater autonomy, which was the concern of several members of the Committee. I am sure that hon. Members will welcome that correction. The employer's contributions will come from the school's budget share and not the other part of the LEA's budget.

Graham Brady: Further to that point of order, Mrs. Adams. We are grateful to the Minister for that clarification, but since he was not sure of the position on employers' pension contributions in regard to variation in pay and conditions, can he assure us that a local education authority will never incur liability as a result of decisions taken by a school?

Stephen Timms: I said earlier that the cost of changes to the software system, for example, would be low. I cannot say that there will be no liability whatever but I am not aware of any significant liability that will fall on the LEA budget.

Chris Grayling: Further to that point of order, Mrs. Adams. Will circumstances exist in which a school could rewrite the terms of an individual's pension arrangements or are they rigidly subject to the authority's pension fund provisions, so that they cannot be varied?

Stephen Timms: The terms of the teachers' pension scheme are clearly laid down. A school could enter into a different kind of pension arrangement with a teacher, but in such a case the LEA would not be liable to make contributions beyond those to the teachers' pension scheme. I have considered that possibility but, although the avenue is open, it would not place liabilities on the LEA beyond those that I have mentioned.Clause 10 Powers of governing bodies to form or invest in companies to provide services etc

Clause 10 - Powers of governing bodies to form or

Stephen O'Brien: I beg to move amendment No. 22, in page 7, line 28, at end insert-
' ''prescribed description'' means in accordance with the Memorandum and Articles of the Company. 
 ''prescribed person'' excludes- 
 (i) the Secretary of State; and 
 (ii) any member or officer of a local education authority.'.
 I add the warm appreciation of Opposition Members at seeing you here, Mrs. Adams. Our sympathies are with you; we have all suffered from the queues to the car park. 
 The amendment seeks to add two definitions to subsection (8)-the definition of ''prescribed description'', which appears in clause 11(3)(a), and ''prescribed person'', which appears in clause 11(4). In our previous discussion, it became clear that at the heart of the series of amendments on chapter 3 is the lack of clarity and specificity about the nature of the corporate entity that it is intended will come into being with the encouragement of the Secretary of State or under the other powers conveyed under the chapter. 
 Clarity and specificity must be put in place because we are dealing with risk. Wherever there is a corporate entity, directors have a duty to assess risk. They have a fiduciary duty, not only to the board and the company but in terms of their authority in committing the company to risks and liabilities. The commitment that they give each time they contract with any supplier or provide any service to customers must be undertaken on the basis that those treating with the company know its assets and the level of liability that can be met, and can therefore judge risk. We need to probe in detail what corporate entities the Government envisage. It would be helpful to have a set of pro forma regulations as we deal with this chapter. So much is left in airy-fairy terms that it is difficult to know whether the Government are aware that the regulations would deal with a raft of matters that we will be discussing later. The amendments, some of which are probing, are appropriate. 
 In vain, I have searched for help in the explanatory notes, which I thought might have been some of assistance. However, they do not help in the slightest. I hope that I am wrong, but the Government appear to believe that if one calls something a company, all will be in rosy in the garden. No one with corporate experience would believe that. 
 In using the phrase ''if regulations so provide'' in clause 11(3)(a), the Government are maintaining a discretion not to issue regulations, which makes my points all the more germane. The Minister said earlier that regulations will be promulgated, and although he could not commit to having them available this morning, he hoped that they would be before the Bill went to the other place. It would be exceptionally helpful if they could be available before the Committee progresses, as they are critical to so many points. If the regulations were satisfactory, it would curtail the time required to consider the Bill. 
 Clause 11(3)(a) states: 
''The company must, if regulations so provide-
(a) be prohibited by its constitution from admitting to its membership any person who is not of a prescribed description''.
 The amendment would ensure that that ''prescribed description'' means in accordance with the memorandum and articles of any company. One might expect that to be axiomatic and that regulations would provide for it, but in their absence it is necessary to make that point. A cursory understanding of company law clarifies that anything of a prescribed description not encompassed within the memorandum and articles of association-under table A in former days as the pro forma type of memorandum and articles-would technically be ultra vires. We must ensure that we do not pass law that has the potential to make regulations forcing any company-not just ones limited by guarantee-to conform to requirements at odds with its memorandum and articles. We must ensure that we are not creating the potential for ultra vires measures. We have discussed lawyers' charters in the past, but any judge who had to make a decision based on the Bill would rightly be critical of a Committee that did not highlight this issue and get a satisfactory answer from the Government. 
 I turn to the critical issue of ''prescribed description'' being in accordance with the memorandum and articles of association of the company. There is always a section in the articles about the rights, duties and, indeed, capacity of directors. While the articles do not have to define in detail the type of person the director is, the overall duties of a director, in particular the producing duties, where they are owed, must be defined. Given that we are talking about companies which will provide services and facilities to schools, and that the Government have already admitted that they can easily be expected to own assets which might well be owned by the LEA or by the school itself, to whom are the primary duties owed: shareholders, employees or customers? 
 The facile answer frequently used by the Government in rhetorical utterances-which has even become the fashion in the City of London-is the stakeholders. That is a convenient way of saying, ''I do not have to give you an answer at present. I am waiting to see which way the wind will blow and I will try to create a sense of partnership with everyone and try to be all things to all people.'' In corporate life strict duties are owed to shareholders for the capital employed, in customer service and above all, as a company director, to employees and staff, the terms and conditions pertaining to their employment and, increasingly, their well-being, under a raft of regulatory and further statutory provisions. 
 It is not clear whether, unless persons are vetted under the term ''prescribed description'' in accordance with the memorandum and articles before a company can be approved, there would be a duty to pupils. I aired my greatest concern in my debate with the hon. Member for Harrogate and Knaresborough (Mr. Willis) on the previous clause-it is a matter to which we will come and I had to beg his indulgence to wait for further amendments. When such companies come into existence, I would be staggered, and I dare say so would the Government, if there was not rapid consolidation of the market within a five-year view. There will be takeovers and corporate activity. At that point, where are the pupils' interests protected? As regards borrowing money, if a company is at risk of financial difficulty, the greatest danger is faced by the pupils. That is notwithstanding the fact that they have had to earn the right of being an LEA-approved facility, which can be trusted because it has demonstrated a good track record. These things can often go in cycles; they depend on individuals and particularly on the head teacher at the time. Who is to say that there will not be a failure? Will the pupils be at great risk if the company suddenly becomes at risk? In those circumstances the Secretary of State is meant to have powers to intervene and there are various probing amendments on that matter. 
 The Bill should contain a provision suggesting that the ''prescribed description'' is in accordance with the memorandum and articles of the company. I am by nature a deregulatory person, but if regulations are to be issued, one of the prerequisites for such a company should be that in the memorandum and articles heed must be paid to pupils' interests. Squaring that with the responsibility to shareholders would be a matter of judgment. In the case of unexpected financial difficulty in the company, pupils going through a school will therefore not be the victims. At the moment there is no such protection. This amendment is intended to flesh out that necessary priority. We as a Committee have a common interest in ensuring that pupils' interests are not at the mercy of the risks of corporate life.

Stephen Timms: I reaffirm the commitment that I made to the Committee last week that we will set out the policy that underlies the proposed regulations before the Bill leaves the House.
 Amendment No. 22 would remove part of the system that we want to put in place to protect school companies. Restricting ''prescribed description'' to mean in accordance with the company's memorandum of articles would remove the ability to prevent certain bodies from joining companies, which we want to retain. We want companies to operate with as much flexibility as possible, but we still want a basic framework of protection that will cover who can join companies. Membership of a company will be significant to its operation, so we want the power to protect companies, when necessary, from having certain bodies as members. The amendment would impede that. 
 Such protection would be necessary where there was a clear conflict of interest. A stationery company might want to join and so become the sole supplier of stationery to the school company, which would be likely to limit the freedom of the school company to select the best deal for its members. We want to exclude potential conflicts of interests, and the regulations would allow us to do that. 
 We also want to exclude unsuitable individuals, such as those who have been barred from teaching or those with certain criminal records. The amendment would prevent us from making such exclusions. I hope that the hon. Member for Eddisbury (Mr. O'Brien) will think that it is right that amendment No. 22 should not be accepted. 
 We also want to protect companies by prohibiting them from borrowing money without permission. The best protection from running up large debts would be to require permission to borrow from those in a position to make a decision and to give advice based on the company's financial health. The amendment to ''prescribed company'' would prevent the Secretary of State, or an LEA, from exercising that power. Before we finalise the regulations, we want to consult widely on where that power should rest. The best organisation is likely to be the LEA, which the amendment would exclude. On reflection, the Committee may want to ensure that that power remains. In the light of that explanation, I hope that the hon. Gentleman will decide not to press the amendment.

Stephen O'Brien: I thank the Minister for trying to address my concern, and I accept that I may not have explored the definition of ''prescribed person'' as fully as I should have in my opening remarks. We suggest that it should exclude:
''(i) the Secretary of State; and
(ii) any member or officer of a local education authority.''.
 The Minister probably made a slip of the tongue when he referred to a ''prescribed company'', rather than a ''prescribed person'', as intended. 
 The Minister addressed the purpose of the amendment, which is to delve more deeply into the nature of the intervention, or the interference, especially in the case of a school that has qualified to go down that route and has been trusted to have a delegated budget. Where is the element of trust in the relationship between the school, the company, the Secretary of State and the LEA? Is it just a means of retaining control and not giving corporate freedom, as intended? If one sets up a corporate vehicle, one intends to have the benefit of incorporation, which means that the entity can be assessed by its track record and merits and enter into contracts. It is a legal entity in its own right, as a person is, and stands or falls on the basis of its performance. Either it is to be trusted as a mechanism to deliver better services, economies of scale and all the benefits to which the Government have alluded, or it is a halfway house, over which the Secretary of State and LEAs intend to exercise tight control. 
 Based on the regulations that are implied by the Bill, I am concerned that the companies will not have much freedom of discretion and activity. That begs the question, why have the corporate entity structure? Would not it be better to accept that the entity is a convenience, or a halfway house? Some might interpret it as no more than smoke and mirrors, or a disguise by which the Secretary of State is able to retain centralised control. 
 That goes to the heart of a complaint that the Opposition have about the Bill. During the recent general election campaign, about which I do not want to go into too much detail, there was wailing and gnashing of teeth by Government Members about the Conservative party's free schools policy. It is difficult to imagine how that policy could have been implemented by any measure other than this one, except that our measure would not have allowed the same level of interference. However, we cannot be sure about that, because the regulations have not been published. 
 It is fair to say that history has been significantly rewritten. The Labour party has forgotten what it complained about in the past. Autonomy was precisely what made the Conservative's policy on education-if not on other issues-right and popular. It is right to seek economies of scale for things such as bus services, accountancy and legal support and the provision of school meals. 
 I am concerned that the Bill does not address that tension and that the Minister avoided answering my point about ultra vires issues. I am not satisfied that a ''prescribed description'' would be constrained by the memorandum and articles. During the by-election campaign, which I won, the Labour party sought to denigrate me by saying that I was on the board of directors of 273 companies. That was absolutely true; I am the group company secretary of a UK FTSE 100 company. Thus, I am familiar with all types of corporate entity in the UK and in 35 other countries. My experience leads me to believe that a level of ignorance has crept into this measure. Articles can be amended and made specific to purposes. A memorandum of association carries the overall architecture and intent of a company and defines its vires, whereas the articles of association outline the operational aspect of the company. That was germane to our discussion of the Limited Liability Partnerships Bill-I was honoured to sit on that Committee. 
 The Minister has not satisfied me on the issue. I am disinclined to press the amendment to a vote because it is futile to press something that might be addressed by the regulations, which are not available to us. This probing amendment gave us an opportunity to put our concerns on the record. If the Government are not able to provide clarification when the Bill is considered in another place-assuming that it moves beyond Committee stage-they will rightly be condemned for trying to slip the measure through without having thought about its implications for the quality of education. As I said, I am not prepared to press the amendment to a vote, but it would be helpful to have an answer about the ultra vires point before I withdraw the amendment.

Stephen Timms: I am happy to provide a little clarification. We want companies to have maximum freedom, but we also want some basic protections in place. The amendment would change the provisions about membership of companies and borrowing, which we view as an important part of the available protections. I will argue later that the hon. Gentleman's proposals are unduly onerous in view of our concern that companies should be as free as possible.
 I was grateful to the hon. Gentleman for reminding us of the free schools policy, but I was hoping that he would tell us whether that remains the Conservative party's policy. We certainly look forward to clarification on that. 
 On the issue of ultra vires, company law will apply to all companies, so there is no question of them being able to contravene any aspect of company law. The general framework of company law is highly likely to address the hon. Gentleman's concern. We may return to the same issues when we debate later amendments, but I presently see no danger on that front. 
 I was impressed by the research capabilities at Millbank, which established that the hon. Gentleman is on the board of 273 companies. I look forward to the Committee gaining from the expertise that that accomplishment provides.

Stephen O'Brien: I thank the Minister and assure him that I was paid in respect of only one job, and that the rest were gratis. The Minister has acknowledged that, in terms of ultra vires, companies would have to operate within company law, particularly the Companies Act 1985, but there remains the danger of shareholders raising issues at annual general meetings. I am attempting to envisage what I believe will be a rapid consolidation in this market once it gets under way. Within five years, other companies will spot opportunities where there have been ultra vires actions because the constraints are not set out effectively in the articles. Directors of companies have ostensible authority-not to mention board resolutions-and there is a danger that ultra vires issues could lead to damage and liability falling on those directors, resulting in takeovers and other forms of administration, which need to be seen as part of the overall risk. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Stephen O'Brien: I beg to move amendment No. 23, in page 7, line 31, at end add
'and the freedom to raise finance secured on the assets of the company'.
 The Minister touched on these issues earlier. The amendment would add a provision to subsection (9) to provide a company with the freedom to raise finance or borrow money secured on that company's assets. It is always possible to borrow money without assets, but the amendment would provide some recourse in the event of a default. 
 Paragraph 66 of the explanatory notes states: 
''Companies may not borrow money without consent.''
 I hope that clause 11 and the anticipated regulations, which are becoming gloriously embroidered as we move forward, will provide some opportunity for companies to borrow money. At present, it is not clear. The difficulty is that the quality of teaching, the certainty of directors, the ability for a more entrepreneurial spirit to capture the synergies and economies of scale necessary to release funds more for education than just support services will mean that there is a danger that companies will run into cash flow problems, irrespective of whether they initially intended to borrow money. 
 Later amendments deal with the issue of not unreasonably delaying decisions or withholding consent. Under the Bill, it is possible for consent to be withheld or for decisions to be delayed, which could throw a company into cash flow difficulties. Support services and facilities and even the provision of assets could be put at risk-not because of an intention to default on a loan but because of cash flow problems. Do the Government want such a company to have to gain consent, in already difficult circumstances, in order to be allowed to borrow money, or does the Secretary of State view it, under the regulations, as a company limited by guarantee? We all know that such companies are limited in terms of the amount of the guarantee. For charitable purposes, they are often limited to £1 for each member of the company. 
 The Government response will be interesting. What is the intended level of guarantee and who will be the guarantors? Do the Government or the LEA intend, by regulation or other means, that the public purse will be the indemnifier of the shortfall in a cash flow crisis where there is no immediate prospect of recovery and when the guarantors in a company limited by guarantee have insufficient funds to continue with the provision of education? 
 Cash flow problems can result from a customer's failure to pay, which could be the result of delay, or because of a company's obligation to pay its staff on the due date in accordance with its terms and conditions on remuneration and expenses. Who will suffer in a cash flow crisis? Will it be the guarantors? If the guarantee is not enough, will it be the indemnifiers under the definition of the public purse? 
 It could be that we are talking about a school whose budget has been delegated and is to be trusted. If so, we are entering a much riskier world for education-that could be the concept behind the Bill. Is it a mechanism through which financial difficulties-the Bill contains provision for the monitoring of the condition and performance of any company and some prescriptions for reporting-can be dealt with? 
 We have noticed the Government's difficulties-to many people's woes-with Railtrack. That company was put into administration because of a perception of financial difficulties. We now find that Railtrack's declared and audited profitability was such as to beg the question whether administration was justified. I am not in a position to judge whether the expected amount was reasonable, but there was a proper expectation that the public purse would continue to provide a proper level of funding in support of Railtrack's operations. The amount and the purposes to which the money was put are obviously being disputed, but the reasonable expectation was clear. The sudden stop forced a crisis and, apparently, justified the Government's decision to place a major infrastructure operator of our nation into administration. They now have a major problem on their hands, as indeed have all of us who have at heart the national interest in transportation. 
 What a disincentive for entrepreneurs. Does it beg a duty for directors that is not in the Bill? Initially, the companies will be quite small, but within five years, after consolidation across the nation, they could be huge. Will directors be under a duty to warn the Secretary of State, irrespective of when the regulations are issued, that there is a remote possibility that a company could be at risk if there were to be a delay or some kind of interest rate upheaval in the economy? They may not have borrowed money, but they may be dependent upon trust fund income. Plenty of endowment trusts are geared to certain schools. 
 If there were a crisis affecting the return on that trust is there a duty upon the directors, beyond the normal fiduciary duties set out in the memorandum and articles, to warn the Secretary of State and the LEA that it could be in financial difficulties so as to provide the LEA with enough time to ask the Secretary of State to step in to stop pupils' education being put at risk? Under normal corporate procedures, by the time the financial stress is apparent, it is often too late to stop the processes of administration or financial crisis affecting the customer, supplier or services provision base. Paragraph (xv) of amendment No. 61, which we will come to later, is intended to try to flesh that out. Presenting the case is awkward, as many of the amendments have to cut right across chapter 3. 
 I do not think that I have deliberately misunderstood, but the Bill is deeply confusing about the Government's motivation. Do they anticipate intervening early enough so as not to prejudice educational services? If so, what are the duties of the directors in the absence of the regulations or indeed any of the amendments that we have just discussed? If it is a company, there should be trust placed in it to enable the process to be free from the Government's control. If that is the case, it must face up to the fact that, in corporate life, not everything will continue as planned. Major jerks and hiccups can take place in all corporate life because cash flow is everything to corporate survival. 
 The duties of directors have become increasingly unclear. The purpose of amendment No. 23 was to establish the true freedom of a normal corporate entity under the Companies Act as specified in the clause. Incomplete qualifications are set out in the Bill. Under the Bill, money can be borrowed because it may be needed to continue the provision. It may be a duty of directors to seek to continue the survival of the company in the interests of shareholders, customers, suppliers and, above all, staff and pupils. If it is a question of borrowing money on the assets, who has the lien on the assets? If it is a company limited by guarantee, the assets may be far more valuable than the combined value of the guarantees, in which case do the Government have a right of lien by way of indemnity if they accept that there has to be some liability to ensure that the provision of education continues? Is it to the degree guaranteed, or is for the total value of the assets over time? 
 If directors have a duty to forewarn at an early stage, at what point do their duties in relation to fraudulent trading come into play? I am concerned that directors could be guilty of fraudulent trading if they try to continue the uninterrupted education of the pupils, without having a duty to warn the Government when there is a remote financial risk, which anyone could define in theory. It might be necessary for them to warn the Government so that they can step in to intervene through the Secretary of State's powers as set out in clause 12. Anyone who trades within six months of a company going into receivership is at risk. Every director knows that. It is rightly of deep concern to any director. One reason why people feel that they can trust companies and trade with them is that directors dare not put themselves into that position by seeking to trade when they are insolvent. 
 Those are the questions that the amendment seeks to flush out. There is deep confusion at the heart of the Government's thinking, and I look forward to the Minister's response. I hope that he will accept the amendment for all the reasons that I have tried to outline.

Stephen Timms: I do not think that there is the confusion. As I said earlier, we want companies to operate as flexibly as possible but with several basic safeguards to offer protection. Those safeguards include preventing schools from borrowing money without permission. The hon. Member for Eddisbury asked several reasonable questions about the borrowing abilities of the company, and I should perhaps point out first that we envisage two types of company. One is formed to undertake procurement activities on behalf of several schools, and the other is a service provider company in which several schools come together to provide services to either themselves or other schools. There is a distinction between the two. Local education authorities will be liable for some of the debts of procurement companies, but not for those of the service provider companies.
 The hon. Gentleman asked about limited liability companies. That will be set out in the policy statement that I promised the Committee. It is likely that many purchasing companies will be limited by guarantee, but much less likely for service delivery companies. If we decide that companies should be limited by guarantee, my expectation would be that the liability would be limited to a nominal amount-£10, or along the lines that the hon. Gentleman suggested. 
 To reclaim VAT, which a company providing procurement for schools would need to be able to do, such companies will be deemed to be acting as agents of the LEA, which is why the LEA becomes liable in those circumstances. That does not arise with service provider companies. Purchaser companies will be spending their member schools' budget share; service delivery companies will not-they will be charging for their services. We will introduce a system through regulations whereby LEAs can monitor companies and act appropriately on that monitoring. Regulations will provide for the supervision and auditing of companies, which may involve designating a supervising LEA. Companies will be required to make financial information available to LEAs, so that risk can be minimised. If a company is financially mismanaged, regulations will provide a warning mechanism and, should it be necessary, arrangements for schools to leave the company or for winding up the company. 
 The amendment would grant governing bodies of member schools and companies the ability to borrow money secured on the company's assets, without having to seek permission. That would reduce the effectiveness of the basic financial safeguards that I described. Our proposition is that schools must seek permission to borrow because, in the circumstances that I outlined, liabilities could arise on an LEA. If the schools have permission, they will be able to secure the borrowing on the assets of the company. There is nothing to prevent that, and it might be appropriate. 
 It is worth noting that the companies are unlikely to be asset rich. For example, the land and buildings of the individual school members will not transfer to the company, so no loan could be secured on them. Ownership of land and buildings depends on the category of school in the framework. No maintained school would be free to transfer them. The LEA owns the land and buildings of community schools; trustees, which are subject to charity law, own the land and buildings of voluntary schools; and the governing body of a foundation school, which is also subject to charity law, owns the land and buildings of foundation schools.

Graham Brady: The Minister's reply is helpful, as my hon. Friend the Member for Eddisbury will agree. In the instance of a governing body establishing a company to provide an educational service, which might be operating a school, possibly in an area where another school has failed, it would presumably be possible for that company to purchase assets, schools buildings and so on, in order to carry out its functions.

Stephen Timms: I am grateful to the hon. Gentleman for intervening on that point, as we do not envisage companies running schools. It will remain the governing body's task to run the school. Companies will be established to provide services to support the governing bodies in that work. Given that construct, the circumstances that the hon. Gentleman described will not arise. Indeed, his hon. Friend the Member for Eddisbury expressed anxieties about education being put at risk. The Committee should not worry about that; education will continue as normal. The school budget share is separate and will continue to be so. We do not envisage the companies running schools but providing services to support governing bodies in the work that they carry out.

Stephen O'Brien: The Minister shed some light on the nature of the ownership of assets, which was not clear from the Bill or the explanatory notes without having the regulations or the policy statement. The amendments are important in flushing out what the Bill intends, as it lacks clarity.
 For example, under existing law and regulations, a private company has offered a high school in my constituency-one of the top five in the country-an information technology centre. The school has been exceptionally positive in wanting to accept it, but the LEA, which takes its responsibilities seriously, took a long time to negotiate the form of support and the contract. In this case, the assets are not land and buildings but the services being provided by the private company for the pupils. 
 Information technology assets tend to depreciate rapidly, which is an accounting issue, but, none the less, they are assets and in the early days before depreciation bites, they could be of great value. Have the Government taken account of the fact that assets are not just land and buildings?

Stephen Timms: I do not have details of the hon. Gentleman's example. He is right; there could be computer assets. It is unlikely that people would want to borrow on those assets, although that must be considered. I agree with the hon. Gentleman that it is helpful for questions and answers on what I accept are probing amendments to be placed on the record. There would be serious concerns if significant land and buildings were involved; I hope that I have reassured the hon. Gentleman that that is not the case.

Andrew Turner: I assume, when the Minister says that companies will not be allowed to run schools, that he means they will not be able to take the place of the governing body, which is the legal entity, but that otherwise the delivery of services to schools is more or less unlimited. That may be with the exception of clauses 34 and 35, relating to the provision of staffing, which is perhaps the most important service that a school can require. Have I understood the Government's approach correctly?

Stephen Timms: Yes, the hon. Gentleman is right. We envisage that governing bodies will continue to have their current role and will not be replaced. There could be models in which a company replaced a governing body, but it is important for the Committee to recognise that we do not envisage such a model in this respect.

Stephen O'Brien: I noted the Minister's explanation that an LEA would be liable for some of the debts of a procurement company, because it would be acting as the agent of the LEA. I was not sure where the definition of ''some'' would come. I hope that I heard him correctly. That situation will need to be explored. Although that is intended to be the use of a budget, a crisis will be caused when the money has been spent, the budget used and there is an inability to recover a payment. There will be such failures, because we do not live in a perfect world.
 It would be inappropriate to delve into the detail, but the conceptual difficulty has been placed on the record. I very much hope that the Minister and his Department will reflect on it and that we shall hear more later, whether in Committee or in another place. In the light of our discussion, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 10 ordered to stand part of the Bill.

Clause 11 - Limits on powers conferred by section 10

Andrew Turner: I beg to move amendment No. 97, in page 7, line 35, leave out-
'(a) with the consent of the local education authority, and'.

Irene Adams: With this we may discuss the following amendments: No. 24, in page 7, line 35, after 'authority', insert
'(which shall not unreasonably be withheld)'.
 No. 25, in page 7, line 37, at end insert 
'(which shall not unreasonably be delayed in being allocated and delegated)'.
 No. 56, in page 8, line 31, leave out 'may restrict' and insert 'shall make clear'. 
 No. 59, in page 8, line 32, at end insert 
'(where such refusal cannot be exercised unreasonably)'.

Andrew Turner: The justification for amendment No. 97 rests very much with the Government's failure to provide information on their thinking beyond that in the explanatory notes on the conditions under which a local authority may be permitted to intervene to prevent a governing body from establishing a company of the relevant kind. I am sure that Government Members realise from our decision not to oppose clause 10 stand part that we broadly agree with the proposal.
 Why should the local education authority have the opportunity to prevent a governing body from entering into the creation of such a company? Many local authorities are effective; some are utterly ineffective. I realise that the Government are struggling-I congratulate them on their struggle and, in one or two cases, on their achievements-to turn round those LEAs. I think that one LEA is now the subject of a third intervention, of a different shape from the previous two. I am not sure why that LEA, for example, should be entitled to intervene to prevent what may be an effective school from deciding to go down the road for which the Government have provided. That is a question of competence. 
 There is also the question of political will. Some LEAs may conclude that it is inappropriate politically for schools to take advantage of the legislation. I am sure that they would not be Labour-controlled local authorities and I am pretty sure that they would not be controlled by the party of which I am pleased to be a member. However, there may be local authorities, if not in England, perhaps in Wales, with a rooted political objection to the involvement of governing bodies in private companies. 
 The Government have not said why they believe that local authorities should have a role in preventing schools from taking such decisions where those schools believe them to be appropriate. The only clue is again in the explanatory notes, which state that 
''Regulations will set out the basis on which an LEA may refuse consent.''
 Subsection (7) also gives some indication, in that it empowers the Secretary of State to restrict consent by regulation. 
 One would be much happier if the regulations were an indication of the Government's thinking. Why are the Government establishing another hoop? If they have the power to foresee circumstances in which it will be appropriate for an LEA to be permitted to intervene, why give that power to the LEA? Why not simply restrict the powers of the governing body in certain circumstances? For example, the regulations may state that an LEA can refuse to allow a governing body to participate in a company only where the school is operating under special measures, or has serious weaknesses. If the Government believe that, why do they need the LEA to be in the loop? Why must the governing body jump through another hoop? 
 The Government seem to have a reasonable understanding of the danger of local authorities taking perverse, unnatural decisions for political reasons, or simply because of incompetence or stretching out the time to take those decisions. The Government are handing the decision to a subordinate authority, instead of making the decision themselves. I want to understand why that is the case.

Stephen O'Brien: I shall speak to amendments Nos. 24, 25 and 59. Amendment No. 27 was submitted in due time, but was not selected. It might have been, were there not a typographical error on the amendment paper. The amendment, as I wrote it, stated:
''after 'requirements', insert '(which must be specific and certain)' ''
 and not: 
''after 'requirements', insert '(which must be specific and contain)' ''.
 That would have made sense. I am sorry to see that error, and that the amendment was not selected. I do not know what procedural opportunities may be open to me to table the amendment again, or whether you have the discretion, Mrs. Adams, to enable me to cover the point. May I have guidance?

Irene Adams: It is reasonable for the hon. Gentleman to speak to amendment No. 27 as well, given the correction.

Stephen O'Brien: I am grateful, as it hangs together with the other amendments. I wanted to give the Minister notice that I was also speaking to that amendment, and I hope that he will give a happy and instinctive response.
 It would help if the regulations already existed for us to study, but they do not. Amendment No. 24, which my hon. Friends and I tabled, follows on from amendment No. 97, which my hon. Friend the Member for Isle of Wight (Mr. Turner) discussed. However, they are mutually exclusive, in that my hon. Friend's amendment would leave out clause 11(1)(a), so that the LEA's consent would not necessarily be required. If the Minister is not minded to accept that amendment, I hope that he will find it reasonable and practical to accept amendment No. 24, which would amend the clause so that a local education authority could not unreasonably withhold its consent to a governing body of a maintained school exercising any power conferred by any of the subsections (1) to (4) of clause 10. 
 It could be argued that a local education authority would never-shock, horror-act unreasonably and that the amendment is therefore otiose. On the contrary, all hon. Members, irrespective of party affiliation, have witnessed-only, I hasten to add, outside our own constituencies-apparently extraordinary decision-making on the part of LEAs that would not pass Lord Denning's famous test of what the man on the Clapham omnibus would think reasonable. We must insist on trying to prevent such unreasonable decision-making, not just because it is wrong in itself-that would not be a strong argument for acceptance of an amendment-but because of the arguments that were made for previous amendments. Although those amendments were withdrawn, they have a major impact on unreasonable decision-making and time delay-factors that are at the heart of amendment No. 25-that could put some companies, particularly service provision companies, into a cash-flow crisis. That could be critical for children at a school in receipt of those services. 
 It is therefore important to demonstrate that no dogma will be attached to any of the decision-making. I would be extraordinarily surprised if any member of the Committee had not seen, at some time in their political experience, evidence of local decisions that are informed by dogma. Labour Members have often levelled that criticism at Conservative Members, and we have not infrequently levelled it at them. It is a fair point. LEAs could engage in deliberate stalling and be determined to prevent the mechanism. The Secretary of State seeks general powers to intervene, but such override powers can be politically inconvenient and dangerous; all the political responsibility would fall to him and no Secretary of State could say that his hands were clean.

Chris Grayling: My hon. Friend may not have noticed that there is a further intriguing dimension to this: under clause 12, the Secretary of State has the right to invest in any company that is to carry on such activities. That opens up the intriguing possibility of a school setting up a company, the Secretary of State agreeing to support it and the LEA deciding to veto or delay it to make it impossible to set up. That would obscure the dividing line between where responsibility starts and stops.

Stephen O'Brien: My hon. Friend makes a precise and valuable point. It is not light-hearted; it is deeply serious. If we do not accept the amendment, the only safeguard against dogmatic and unreasonable behaviour would be the exercise of power by the Secretary of State, which, in the nature of things, will not necessarily always be politically convenient. It may therefore affect the exercise of that decision and intervention.
 Amendments Nos. 24, 25 and 59 apply to subsection (7): 
''regulations may restrict the circumstances in which a local education authority may refuse to give any consent applied for under subsection (1)''
 Such a refusal may not be exercised unreasonably. All the amendments are consistent and are designed to inject a clear expectation that dogmatic, unreasonable behaviour will not influence decisions by local education authorities. One would patently expect that from the Secretary of State. I have not even bothered to pursue that, because any Secretary of State would seek to act reasonably. 
 Secretaries of State know that their decisions may be subjected to judicial review. That is equally the case when so much that flows from the Bill will be in secondary legislation. It is more difficult to seek a judicial review of decisions taken under secondary legislation. Because the power set out in clause 12 is under primary legislation, any decisions that follow are open to judicial review. A local education authority could be open to review through the ombudsman, and ultimately the courts, because the grounds for an application for judicial review would be clear: the reasonableness test would be applicable, and would have to be justified. 
 Without amendment, the Bill will be seriously deficient. It will become a hollow call to an entrepreneurial and exciting form of providing services and facilities for education. Although it may be a bumpy ride, it could be valuable if implemented correctly. However, dogma may get in the way, not making the Bill a mere damp squib, but deliberately undermining it. That would thwart the will of Parliament.

David Laws: I am pleased to take part in the debate in the absence of my hon. Friend the Member for Harrogate and Knaresborough, who will rejoin us in his robust way for this afternoon's exchanges.
 The amendments are important, and I hope that the Government will accept several. I shall speak to amendment No. 56, which is designed to clarify the circumstances in which LEAs may be able to deny governing bodies the exercise of powers. We have already discussed amendments Nos. 97, 24, 25 and 59. I support the latter three, which create a sensible presumption that LEAs that deny governing bodies those powers should do so for good reason. I support the amendments tabled by the mainstream Conservative party, but I cannot go as far as the Isle of Wight branch in denying the LEA a role altogether. 
 The hon. Member for Isle of Wight raised two objections to the element that he seeks to delete. The first was that a specific LEA might have a political presumption against granting powers to a governing body. Amendments Nos. 24, 25 and 59 address that concern. The hon. Gentleman raised a legitimate point about the Government's intentions in restricting the powers, and I hope that amendment No. 56 will shed light on them. It is reasonable to give LEAs some power in circumstances where there may be serious doubt over whether schools and governing bodies can exercise those powers. I imagine that the number of cases would be small. It is reasonable to give LEAs the power to prevent governing bodies from entering into those arrangements for a period of time. 
 There is a strange anomaly in the Government's thinking. They seem relatively happy to give a great deal of flexibility to schools to set up such companies, yet at the same time they envisage that earned autonomy will be available to only about 10 per cent of schools. There seems to be a tension in the amount of power the Government are willing to allow individual schools to exercise. 
 Sharp-eyed members of the Committee will have noted that the wording of amendment No. 56 is not perfect in terms of what it seeks to replace, so I may not press it to a vote, but amendments Nos. 24, 25 and 59 are important and I hope that the Government will accept them.

Stephen Timms: The provision for regulations under clause 11 will restrict the circumstances where an LEA may refuse to give consent to a governing body applying to form or join a company. We intend that those regulations will go further than amendments Nos. 24 and 59, in that they will prescribe the circumstances in which consent can be refused. Both amendments refer to unreasonableness-that local education authorities are required in general law to act in a reasonable way. Because the regulations will prescribe the circumstances in which consent can be refused, the reasonableness points in amendments Nos. 24 and 50 will be covered.
 In contrast to the views of the Isle of Wight branch of the Conservative party that the hon. Member for Yeovil (Mr. Laws) has just described-that local education authorities are best placed to make decisions on school membership of companies-amendment No. 97 would remove the need for schools to obtain consent from their local education authorities to join companies. 
 The hon. Member for Isle of Wight asked some entirely reasonable questions about the circumstances in which we would envisage LEAs being able to withhold their consent. There will inevitably sometimes be an element of judgment. It will not always be a question of meeting an objective test. There will be only limited circumstances in which the regulations will allow an LEA to refuse permission. We shall consult on them, as I have said. I envisage, as the hon. Gentleman suggested, that a weak or failing school would be one criterion; a second would be where the financial circumstances of the school are weak; and a third would be if the leadership of the school was weak. An LEA will not have to refuse in such circumstances. A weak school might sensibly join a company in order to gain the benefits of partnership with a stronger school. However, it would be appropriate to permit LEAs to refuse permission if any of those three circumstances prevailed. There is inevitably a measure of judgment, not in the first set of circumstances to which the hon. Gentleman referred, but in the other two, where the judgment necessitates obtaining permission.

Graham Brady: Will the Minister explain why he thinks it necessary to have the LEA's consent to form a company, whereas the LEA's consent is not required in chapter 1 for exemptions for innovation, or in chapter 2 for earned autonomy?

Stephen Timms: As I said earlier, in some circumstances with the procurement companies, the LEA's budget could be at risk if things go wrong. The LEA must have a say about whether it goes ahead and, in the circumstances that I outlined, it may need to withhold its consent.

Graham Brady: Is the Minister saying that when a firm is a service provider company-the Minister confirmed earlier that the LEA would not be liable for debts or financial liabilities-the LEA will not be able to deny consent?

Stephen Timms: No, I am not in a position to say that at this stage. Before the Bill leaves the Commons, we will set out in a consultation document the precise circumstances in which that would happen. However, in some circumstances, for example if a school or its leadership was weak or failing, it might be inappropriate for it to enter a certain kind of service provider company. The hon. Gentleman is right to suggest that the major financial risk to the LEA arises with the procurement companies, but I cannot say at this stage that I would exclude the possibility of the LEA withholding permission for service provision companies.
 On amendment No. 25, clause 11(1)(b) requires that only schools with a delegated budget can form or join companies, so the amendment would require that LEAs do not unreasonably delay the allocation and delegation of a school's delegated budget. The principle of the amendment is entirely fair-schools should not be deprived of a delegated budget-but it does not add anything to the carefully constructed provisions of the School Standards and Framework Act 1998, under which a new school must be given a delegated budget not later than its opening date unless the LEA has obtained special permission from the Secretary of State to postpone delegation beyond that date. In practice, many LEAs allow new schools to have delegated budgets prior to opening, which is to be welcomed. However, there is not a sufficient case for bringing forward the statutory deadline for delegation. The LEA is under a strict duty to delegate budgets to existing maintained schools, and regulations under section 49 of the 1998 Act provide that the amount of a school's budget share must be determined before the start of the financial year. 
 If delegation has been suspended, schedule 15 requires the LEA to review suspension annually and allows for more frequent reviews if the LEA so chooses. If delegation has been suspended on the ground of financial mismanagement, the school may appeal to the Secretary of State against the suspension. I think that those measures provide sufficient safeguards. In any event, the amendment simply requires LEAs to act reasonably, but they are under a general duty to do so anyway. Any safeguards that the amendment would provide are already available under general law. 
 Given my explanations and reassurances, I hope that hon. Gentlemen will not press the amendments to a vote.

Andrew Turner: If I may recapitulate, I understand the Minister's assurances to mean that under the limited conditions by which the local authority is entitled to withhold consent, they shall do so if the school is weak or failing and they may do so in the other two circumstances that he set out. If that is the Minister's reassurance, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Stephen O'Brien: I have listened carefully to the Minister. Yet again, this is difficult without having the pro forma regulations in front of us, but the exercise of decisions ''reasonably'' is critical to ensuring no gamesmanship in statute. We hope that gamesmanship will not be encouraged, but it is conceivable. Experience teaches us to think carefully about what we put on the statute book.
 The Minister has sought to be constructive and has said that the yet unpublished regulations may well be stronger than the wording in amendments Nos. 24, 25 and 59. In the absence of those regulations, however, it would be irresponsible for the Committee not to demonstrate the seriousness of these issues, which are germane to the operation of the Bill's underlying concept. We are dealing with the mechanics and architecture of the Bill to ensure its effectiveness. 
 Government Members have given an attentive hearing to our arguments. Heaven forfend the suggestion of a whipped vote. I hope that, before the Bill leaves this House, hon. Gentlemen will join me in pressing for the Government's feet to be held to the fire. If the regulations turn out not to be stronger, the subject of the amendments would be a proper matter for further debate. The amendment should be accepted and the Government's intentions kept honest. I shall press for a vote on amendments Nos. 24 and 25, and I also intend to press amendment No. 59.

David Laws: I shall not press the excellent, but marginally flawed, amendment No. 56, but I am pleased that other amendments in the group are being pressed to a vote.
 Amendment proposed: No. 24, in page 7, line 35, after 'authority', insert 
'(which shall not unreasonably be withheld)'.-[Mr. Stephen O'Brien.]
 Question put, That the amendment be made:-
The Committee divided: Ayes 6, Noes 11.

Question accordingly negatived. 
 Amendment proposed: No. 25, in page 7, line 37, at end insert 
'(which shall not unreasonably be delayed in being allocated and delegated)'.-[Mr. Stephen O'Brien.]
 Question put, That the amendment be made:-
The Committee divided: Ayes 6, Noes 11.

Question accordingly negatived.

Stephen O'Brien: I beg to move amendment No. 28, page 8, line 2, after 'guarantee', insert
'or a limited liability partnership under the Limited Liability Partnerships Act 2001'.
 I touched briefly on this subject in a previous discussion. The amendment would add the possible alternative of a limited liability partnership under the Limited Liability Partnerships Act 2001 to the definitions and opportunities that exist for the companies that will be registered under clause 11, if regulations so provide. My concern is that, in the absence of regulations, it may be presumed that it would not have to be a company limited by guarantee. I think that I understood the Minister to say as much. 
 We are working on the presumption that there will be regulations, and the more we explore the chapter, the more it is clear that the regulations will be detailed and all encompassing. Those who want genuinely to scrutinise and understand the Bill are naturally disappointed. As the regulations are well developed, perhaps the Bill could have been a little more detailed and less of a blank cheque for the Secretary of State. 
 The opportunity that the Government rightly provided by the introduction of the Limited Liability Partnership Act had been recommended for some time by bodies outside the House, and was driven through against the wishes of several Government Back Benchers who took a somewhat hostile view to the accountancy profession. In the end, the Government prevailed, and that provision is now on the statute book. That move was driven primarily by the large accountancy partnerships, which have consolidated in recent years. We have limited liability partnerships because it became unreal in today's world to expect partners to be liable to the extent of the shirt on their back when operating in a professional environment with liabilities well beyond what anyone could reasonably expect, and for which insurance cover was becoming increasingly difficult or expensive to provide.

Stephen Timms: I acknowledge the hon. Gentleman's expertise on this matter. Will he confirm that the Limited Liability Partnerships Act was passed in 2000 rather than 2001, as the amendment suggests?

Stephen O'Brien: I remember serving on the Standing Committee in 2000, but I had thought that it had taken longer to gain Royal Assent. It seemed an inordinately long time, and I am grateful for the correction. I hope that, as we discuss the amendment, we can treat that as a typographical slippage. My pen did not quite make the full circle of the final zero.
 The Minister commented earlier that the Government envisage that companies will be set up to procure services and facilities and to provide services directly. Some of those companies may well provide professional services. Although they may not be accountancy practices or law firms, such companies are developing and embracing the corporate entity known as a limited liability partnership. Many of the management consultancy services that they offer, in addition to audit work performed by accountants, are very much the sort of services that can be provided collectively to schools to achieve economies of scale. Such firms offer legal or accounting expertise, which will increasingly be needed as the number of companies grows. Even if the hon. Member for Yeovil is right in saying that only about 10 per cent. of schools will be subject to the corporate mechanism, that could run into billions of pounds of turnover, and there would be potential for consolidation. 
 If companies draft in professional expertise, a company limited by guarantee may not be appropriate, and we should perhaps consider the use of limited liability partnerships. The flexibility that the amendment would engender is important, particularly if professional expertise is being offered. The limited liability partnership may be the appropriate corporate mechanism for obtaining the necessary professional indemnity liability insurance. 
 A school contracting accountancy services may be anxious about whether a corporate entity providing such services has the wherewithal, if it is limited by guarantee, to indemnify it for acting on inappropriate advice. Therefore, the school would look to the insurance cover that professional indemnity insurance would provide, and that would be much more appropriate under a limited liability partnership, as envisaged under the Limited Liability Partnerships Act 2000. 
 I know from my experience as the director of a limited liability partnership in California that such entities operate successfully. They are increasingly used not only in manufacturing, which I was concerned with, but in the provision of more general services, such as bus transportation. The amendment would offer appropriate flexibility. In the absence of regulations, we do not know whether we are dealing with a chimera or something that will be so prescriptive that companies will not be free to operate independently. With the consolidation that it is envisaged will occur in the marketplace, it is important that the Government accept the amendment as an indicator at least.

Stephen Timms: I am pleased to be able to trade expertise with the hon. Gentleman in the finer points of company law. Amendment No. 28 would provide that companies may be formed as a limited liability partnership rather than as a company limited by guarantee. Through regulations, we will require that companies are formed in a way that will maximise their ability to manage their own affairs. However, in order to prevent unnecessary risks to company members, we will require a company structure that limits risk. That is why we suggested companies limited by guarantee. As I said, we will consult on that before finalising our decisions.
 The limited liability partnership would not be an appropriate vehicle for the companies that we envisage. Under the 2000 Act that the hon. Gentleman referred to, persons entering the partnership do so with a view to profit. He will recall that requirement under section 2(1)(a) of the 2000 Act. In reality, many persons entering the companies that we envisage will not have that aim. Groups of schools forming companies for the procurement of goods and services, so as to benefit from economies of scale and organisational support, will not be formed with profit in mind. 
 There are other difficulties with the rules about limited liability partnerships. That vehicle is essentially aimed at individuals grouping together to do business rather than corporate bodies. I am not saying that it cannot be used by corporate bodies, because of course it can, but the framework in the legislation has been designed for individuals coming together rather than corporate bodies. That leads to rules that make the vehicle inappropriate for the type of company that we envisage in the Bill. The rules relating to agency and the prevention of partners from leaving the partnership without reaching agreement with the other partners, which is a feature of the 2000 Act, mean that that structure would not be suitable for the companies that we envisage in this part of the Bill. 
 We do not want to be too prescriptive in the Bill. We want maximum flexibility. Companies formed with the aim of developing effective public private partnerships or private finance initiatives through joint venture companies would not be limited by guarantee. We would expect them to be limited by shares. As companies established with different aims-PFI or PPP as opposed to purchasing or service delivery companies-may require different structures, we have not specified details at this stage. I hope the Committee will recognise that we need to be flexible to enable the establishment of different sorts of company. We will consult fully on the options. I hope that the hon. Gentleman will therefore withdraw his amendment.

Stephen O'Brien: I am grateful to the Minister for seeking to elaborate on an apparently early joust in the consultation process. Apart from making the obvious point that, although his remarks were intended to be helpful, they demonstrate how many aspects of the Bill have been brought forward prematurely, let me say that the Government seem to know what they intend to achieve with the Bill. However, we cannot scrutinise it because the intention is not recorded in writing either in the Bill or in available regulations.
 I listened to the Minister carefully when he said that members might join procurement companies without a view to making a profit. While he may be correct, the Bill does not proscribe such members coming together for profit. Schools that have demonstrated that they can be trusted with a delegated budget and are seen to be good performers may take advantage of that mechanism. The governing body or the head teacher may be particularly good at managing, motivating and bringing out the best in their staff. They are likely to be completely comfortable with the idea that, to the extent that they can lever that expertise into the economies of scale for the benefit of the children, there may well be an incentive for some form of profit. 
 If the Government are determined not to accept the fact that profit is a natural incentive if one is introducing corporate entities, I cannot see why they have gone to all the trouble of going down the corporate entity route. Of all parties, the Labour party must be most familiar with the co-operative movement, which would appear to be the ideal vehicle to exercise purchasing power. A number of Labour Members also stand in the name of the Co-operative party, and they have access to the co-operative movement. That is not necessarily through companies that are limited by guarantee. A number of corporate entities and structures enable the co-operative movement to be a not-for profit organisation that benefits its members. At the same time, it can have legal responsibilities that enable it to satisfy its duties. 
 The Minister's response was helpful, but it is still unclear why the route has been chosen in the absence of any regulations or greater consideration of the Bill before it was published. What the Government appear to be talking about is no different to what the Monopolies and Mergers Commission, as it was then, sought to do to Milk Mart, which was broken up so that farmers no longer had the opportunity to use their collective purchasing power to ensure that the farm-gate price was not squeezed. Distributors and supermarkets could therefore greatly reduce the value of farmers' produce. The co-operative movement has always been able to exercise purchasing power, but on the basis that it is for the benefit of members, which is how co-operative collectives for farmers operated. 
 We are looking for economies of scale that will benefit schools intending to be members and that will be sustainable, so that by accessing the competitive marketplace, money can be saved and applied to existing educational budgets. It is therefore difficult to see why a company is proposed that is limited by guarantee, when the co-operative movement would have served the purpose better and has a much better track record. 
 In the absence of regulations, it would be facile to press the amendment to a vote, although, as one can tell from my lengthy riposte to the Minister, I believe that the Government's thinking is muddled. I am glad to put on the record that I will not press the amendment to a vote, as the Minister rightly wants consultation on the clause, which I hope will be wide ranging. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Stephen O'Brien: I beg to move amendment No. 26, in page 8, line 5, at end insert-
'(iii) a satisfactorily completed process of due diligence, absence of conflict of interests, due process and the taking of references.'.

Irene Adams: With this it will be convenient to take the following amendments: No. 61, in page 8, line 5, at end insert-
'(iv) maintaining an asset register, 
 (v) making provision for the conversion of the company to a corporate entity under the Companies Act 1986 (c. 6) other than either a company limited by guarantee or a limited liability partnership under the Limited Liability Partnerships Act 2001, 
 (vi) making provision for the flotation of any company resulting consequent to subsection (v) of this clause, 
 (vii) making provisions for the limitation on the company in the event of an acquisition, merger, split and disposal of the company, 
 (viii) preventing the diversion of revenues and assets of the company, 
 (ix) making provisions for the distribution of profits of the company by way of dividend or otherwise, 
 (x) making provisions for compliance with best practice for the nomination and remuneration of directors of the company, 
 (xi) the provision of annual reports and statutory filings in accordance with the Companies Act 1985 (c. 6), 
 (xii) the provision of audit reports, including interim audits, of the company, and in relation to the initial financial period of the company provision for 3-monthly interim audits of the company until the first statutory annual return is made, 
 (xiii) the winding up of the company, 
 (xiv) the provision of guarantees, indemnities and discharge of liabilities without prejudice to the interest of staff or pupils of the maintained school or schools to which the company is providing services, facilities, functions, arrangements or facilitation under section 10, 
 (xv) notification of the local education authority and the Secretary of State of any event or circumstance which, within 3 months from the date of such event or circumstance, carries the possibility in the judgement of the directors of the company of any risk of financial or other difficulty likely to place the company in a position where it cannot meet its obligations, where such obligations may be financial or in the educational interest of the staff or pupils of the maintained school.'.
 No. 62, in clause 12, page 8, line 39, at end insert- 
'(c) intervene to place upon a company a scheme of arrangement or to order divestment of assets with due fair market value compensation and release from contractual obligations where a company has notified the local education authority and Secretary of State under section 11(c)(xv) or otherwise, or on the initiative of the Secretary of State acting upon reliable information where a company is at risk of failing to meet prescribed requirements'.

Stephen O'Brien: If I am tired of my voice, everyone else must be doubly tired of it. I apologise for what appears to be a string of my amendments.
 Amendment No. 26 would insert sub-paragraph (iii) at the point where the prescribed requirements are identified in clause 11(3)(c)(ii). Sub-paragraph (iii) would provide that those requirements would have to show satisfaction with 
''a satisfactorily completed process of due diligence, absence of conflict of interests, due process and the taking of references''.
 By any test, that is the obvious and common-sense nature of engaging in risk. One would expect best practice and a good track record that has generated a higher degree of commercial confidence than before, when commercial matters were not as transparent as they are today in corporate life. All too often, however, there is a justified accusation that obvious due processes are ignored by the ignorant or the greedy when engaging in corporate or commercial risk. I do not seek to over-regulate, but the amendment would make a sensible addition, as the restriction is not set out in regulations. 
 The Minister's response may be that what the amendments propose will be set out in the regulations. I do not want to rehearse yet again my deep frustration at the lack of regulations, but even pro forma, or privately drafted, regulations would help to give confidence and guidance as to what process we can expect by which the freedoms and controls will interplay with the incentives to set up corporate entities that will affect the ability to provide educational services. That is why it is important to debate these amendments. 
 We touched on the other aspect of the issue under the previous group of amendments. Without the references in amendment No. 26 to due diligence, absence of conflict of interests, due process and the taking of references, there is the presumption that it will be more difficult for someone who feels aggrieved to apply for judicial review. If the Government, public servants or local government have not followed basic processes in making decisions, people should always be allowed to challenge them. The amendment would also aid all those involved in decision making by providing a handy checklist to ensure that they could not be challenged at a later date. 
 As we reach amendment No. 61, I see some crestfallen faces around me, as there is quite a lot of wordage. The extra sub-paragraphs (iv) to (xv) are intended to demonstrate the degree to which we, and all those who come after us, need to know the expected risks, opportunities, responsibilities, liabilities, and potential guarantees and indemnities. We also need to know about the ability to service a business that will make the procurement or service provision available in the interests of education and schools, who will carry the benefit and who is responsible for the burden of those corporate responsibilities. 
 I do not apologise for the fact that the amendment is something of a shopping list of things that occurred to me as I read the Bill and wondered where certain provisions were. Having some experience in the corporate world, I expected to see those provisions and duties set out clearly in the Bill. 
 Under the Companies Acts and memorandums and articles of companies, there are obligations such as the first one in the amendment: to maintain an asset register. That should be made explicit in the Bill because those who will operate the legislation will not have had the benefit of sitting in Committee, riveted, as we are, by the Minister's answers and knowing that the provision does not necessarily mean that schools can own land and buildings. An asset register therefore becomes all the more important. It identifies the assets that those who are contracting with companies, particularly those exercising purchasing power, can enforce against. 
 Under a previous clause, the hon. Member for Harrogate and Knaresborough asked about the potential for the takeover of companies, and I told him that he needed to be patient until we reached these amendments. Unless I am mistaken, which I readily admit I could be, nothing in company law forbids a company that is limited by guarantee-that which is envisaged, subject to consultation, under the Bill-from being subject to takeover or a bid. Indeed, the shareholders might be happy to be on the end of an attractive offer. What director facing heavy mortgage payments would not be glad to accept such a bid? I well understand that individuals will make their personal decisions as and when that comes about, and shareholders and directors would expect to do the same. 
 The point of sub-paragraph (v) is that there must be provision 
''for the conversion of the company to a corporate entity . . . other than a company limited by guarantee or a limited liability partnership''.
 I tabled this amendment because I anticipated, somewhat woefully, that the Government would readily accept my limited liability partnership amendment. That little bit is now otiose, given what has just taken place. 
 Sub-paragraph (vi) deals with the ''flotation of any company'', and sub-paragraph (vii) deals with 
''provisions for the limitation on the company in the event of an acquisition, merger, split and disposal of the company''.
 Purchasing power arrangements for bus services, school milk and other services, which the Minister has rightly identified as being among those that the Bill is intended to include, are inadequately expressed in the wording. 
 In the past, take-or-pay contracts put the gas companies under stress because of the need to extract North sea gas on a sustainable basis, and they were lumbered with liabilities. What would prevent companies from entering into a five or seven-year contract for bus services? That may be beneficial, but in the absence of such provisions there may be risks. Of course, such measures may be subject to regulations longer than the Bill, if it becomes an Act. It is important, subject to the laws that apply to such corporate activities, that long-term contracts should protect the interests of children and educational quality. 
 The amendment is designed to trawl around a huge field of potential corporate activity. The marketplace will rapidly consolidate; five schools in my constituency could choose to take advantage of the powers under the Bill for combined services. The Conservative party argued for that in the general election and I am glad to see it rightly adopted as Government policy. We should not waste taxpayers' money if economies of scale can be secured, especially for support that is not direct classroom provision. If five schools combine, it is easy to imagine five counties working together. Distance is not a factor, as is demonstrated by the power of the distribution companies that supply supermarkets throughout the country. 
 Only 20 years ago, if a brick were made in Throckley factory in Newcastle, it would not be sold in Sussex. One can now obtain bricks made in Newcastle more cheaply than those made down the road in Pevensey Bay. The economics of distribution have shifted to the point where providing services across five counties will be cheaper. Economies of scale require an understanding of takeovers, flotations, splits and disposals, and how companies can operate without prejudice in the interests of educational provision. 
 I am concerned that the provisions have not been thought through. Unless the Minister says that a prohibition against such corporate activity will be in the regulations-in which case it should be in the Bill-rapid consolidation will occur because the economies of scale will quickly become national. 
 The Minister has already indicated the restrictions. Proposed new sub-paragraph (viii) would prevent 
''the diversion of revenues and assets of the company''
 The Minister said that that should be subject to regulation and suggested that the companies he has in mind would prevent it from happening. We hope that by setting it out as part of the prescribed requirements provision, it can be addressed explicitly. 
 I noted that the Minister was careful to say that not all companies would be driven by profit. Some, and in time, the vast majority, will be mindful of the excess to running costs that they generate. It is a matter for them if they choose, for politically correct reasons, not to call that a profit. For the benefit of the audit trail, they will find that their accountants will refer to a profit and loss account whether they like it or not. Proposed new sub-paragraph (x) makes provisions for: 
''best practice for the nomination and remuneration of directors of the company''.
 That is a requirement under the Companies Act 1986, but given our discussions about potential company members, it is necessary to have best practice in terms of nominations for due diligence and to ensure that the right opportunities are created for those of talent, expertise and relevance to the board of the company that will deliver the services. If the Government are concerned about proper motives, they can at least ensure through the nomination procedure and the remuneration of those directors, be they non-executive or executive, that those appointed are highly motivated in terms of public service, and are not necessarily motivated by the company's profit in the hope of benefiting themselves. 
 Proposed new sub-paragraph (xi) is probably gilding the lily in requiring the provision of annual reports, as that is already a legal requirement. Proposed new sub-paragraph (xii) raises a concern about the initial start-up phase. A number of companies will have no track record. In previous answers, the Government made it clear that borrowing would be restricted by commission only. As the new companies will not go through the discipline of presentations to bankers when seeking to borrow money, interim audited reports should be provided in the initial financial period. That is why I seek to put that protection in place. I hope that the Government will find that an attractive way of imposing early controls on the companies. 
 We have touched on the winding up of companies. While the Government are learning lessons from the Railtrack administration debacle, directors risk not knowing their duties in cases where there is a potential funding shortfall and a necessity to wind up the company, but where service provision must be continued so as not to prejudice children's education. We have already dealt with the provision of guarantees for the discharge of liabilities. 
 The most important issue is contained in proposed new sub-paragraph (xv). I urge the Minister to look carefully at it, because it goes to the heart of the matter. Reference to Railtrack might seem provocative, but it is a live example of a company being forced into administration by an entity outside the board. What duties did Railtrack directors have to enable someone from outside the board to affect the company's activities? The amendment would show that companies operating under the Bill might well affect the continued provision of education, and the quality required and expected. If the directors do not have some form of duty in addition to that expected of them under current law, children's education could be prejudiced. 
 Clumsy as that provision is, it is intended to convey an important point, which I hope the Government will consider carefully. Amendment No. 61 is grouped with amendment No. 62, which seeks to require the Secretary of State to 
''intervene to place upon a company a scheme of arrangement or to order divestment of assets with due fair market value compensation''.
 I hope that the Minister recognises that there are lessons to be learned from the Railtrack experience. This is not a substitute for refusing to admit that there has been a dogmatic discussion about nationalisation or privatisation of these services. Where corporate identity exists and someone causes an event to take place which forces a company either into administration or to face potential winding-up, assets and obligations are owed to a number of what would be described in these politically correct times as stakeholders, be they customers, suppliers or shareholders. 
 It cannot be said that shareholders are evil, because the Government will look for shareholders to create the companies in the first place. They should not say, ''Thanks, we'll have your money now, but when things get tough and go wrong, you're the first we're going to drop''. That will be the case unless amendment No. 62 is put in place to recognise that shareholders take a risk. They do not expect to be taking such a risk if the Government are to sponsor and encourage the acceptance of a corporate feel to the marketplace, allowing them to release money for public services, as we all wish to see. 
 The Government must take responsibility when they choose to affect the future of corporate entities. They must not fail to pay fair compensation to the shareholders on whose money they relied to get the scheme off the ground in the first place. Amendment No. 26 makes a serious point: if the Government do not accept it, a powerful disincentive may be created and the mechanism will fail to deliver the benefits that we all want.

Stephen Timms: Our approach is that, subject to basic safeguards, companies should be as free as possible to manage themselves. Companies should have the flexibility to decide the most suitable management arrangements for themselves. School companies will have the protection of the Companies Act 1985 and be fully consulted on the framework put in place by the clause 7 regulations.
 The additional restrictions in the amendment are unnecessary. The amendment would require companies to complete processes of due diligence and due process, the nature of which has not been specified. We propose to regulate at a sufficiently detailed level to make such a provision bite. Companies would be required to ensure an absence of conflict of interest, but that is standard practice for company directors under company legislation. It is not clear why we should want to go further here than elsewhere. The general drift of the hon. Gentleman's remarks has been an expression of concern about placing unduly onerous restrictions on companies: the restrictions in the amendment are unnecessary.

Stephen O'Brien: I shall try to highlight without referring to the particular case. Potential directors and members of the company could be current LEA members-they might have retired from the LEA to join the company. It is quite possible to envisage that. Let us suppose that a foreign-owned company applies to place an incinerator in a local community, and that officers and councillors are involved in the decision. If they step down as councillors, they could become directors of the incineration company. That sort of conflict of interest does not arise under current best practice. Potential political conflicts of interests do not usually arise in corporate life. The Bill should specify that such conflicts of interest should be examined.

Stephen Timms: I am not clear exactly how that example applies. Schools will not join companies to establish incinerators. The existing framework of company law covers the hon. Gentleman's concerns. I am resistant to placing in the Bill further layers of restriction that are unnecessary elsewhere. The satisfactory taking of references is another aspect of standard practice.
 Amendment No. 61 would add a great deal to the regulations. We intend to consult fully on those regulations. Interested parties will have an opportunity to say what should be included. If it is felt that particular points in the list should be reflected in the regulations, there will be an opportunity to argue that case. Company law prescribes the responsibilities of directors. Directors appointed to represent schools, LEAs and the Secretary of State will have a legal duty to promote the good management of the company as well as a responsibility to their own public body. It is not necessary for the Secretary of State to have further powers to intervene in the running of individual companies. The company's memorandum and articles will specify the rights of shareholders to receive information and make decisions. 
 In moving the amendment, the hon. Gentleman noted that several of the points are already in the Companies Act, most obviously proposed new sub-paragraph (xi), which says simply that companies should comply with the Companies Act 1985. However, companies will have to comply with all the requirements of that Act anyway, and there is no value in picking out a list of points and reminding everyone that the companies will have to comply with them. The point about an asset register is covered by that, as are several other points. 
 The Committee will agree that governing bodies will make sensible decisions about the operation of companies in the framework of protection that I described. It would undermine the Bill's intention to impose unnecessary red tape or unnecessarily lengthy regulations. I should comment on proposed new sub-paragraph (xv), on which the hon. Gentleman spent some time, and amendment No. 61, which is related. He made a fair point about the LEA needing to be aware of problems down the line or potential financial difficulties. That is already covered by subsection 11(5)(d), which provides that where an LEA is 
''for the time being so designated the company shall provide prescribed information relating to its financial affairs''.
 He makes a fair point about the LEA needing to be aware of that information, but it is already covered in the Bill. I hope that the Committee agrees that the amendments would not strengthen the Bill, but weaken it.

Stephen O'Brien: The speed of the drafting has meant that the amendment is not perfect. Given its length, it was unlikely to be. I shall not press it to a Division because that would be inappropriate, but the points have been made. It is important to ensure that the regulations are detailed and available at the earliest possible opportunity. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Graham Brady: I beg to move amendment No. 19, in page 8, line 5, at end insert-
'(d) meet the requirements of education legislation'.
 I am sure that the Committee is grateful to my hon. Friend, and I can reflect only that, had that weight of expertise from the corporate and legal world been brought to the assistance of the taxpayer in the normal commercial environment, it would have cost a considerable amount of money. It is just one example of how the public receives such a great service from Members of this House. 
 In moving amendment No. 19, I am conscious of the time and the fact that, due to the repressive, restrictive timetabling under which we are operating, we are unlikely to complete consideration of all clauses. [Interruption.] Someone on the Labour Benches said that we agreed to it. If the Government are prepared to suspend their majority on the Committee before we move into the next sitting of the Programming Sub-Committee, we may put that to the test. Regrettably, we are operating under an arbitrary timetable, and some important aspects of the Bill might get no consideration whatever. 
 I am keen to give a brief airing to an important concern that relates to clauses 10, 11 and 12, but is summed up in amendment No. 19. In our examination of aspects of clause 11 so far, the Minister has confirmed by implication that, because some people who form or become involved in companies may not have a profit motive, others may have that motive. In essence, the Government want to establish a framework for what could be characterised as a purchaser-provider split in educational services that sees the creation of companies, whether by a school's governing body or the Secretary of State, to provide services or to purchase goods or services. As the Minister confirmed, the governing body remains responsible for the provision of education but, in the Bill's terms, the governing body may not be directly responsible for providing that education. 
 We have here the bones of a dramatically radical change in the way in which education policy may be delivered in this country. I make no criticism of that and we may be on the verge of providing for an extremely exciting new environment that provides scope for new ideas for the benefit of education. We are, however, contemplating a very dramatic shift, the measure of which is, as the Minister said, that the motivation of those engaged at the public's expense in the provision of educational services may be to make a profit. I have no philosophical difficulty with that, and if the end result is an improved provision of services, that is to be welcomed. 
 What amendment No. 19 seeks to do, however, is constrain the environment within which a commercial operator may practise by seeking to ensure that these clauses do not also become a means of avoiding normal responsibilities under education legislation. 
 Earlier in our proceedings, the Government sought to provide for removing controls from schools to allow exemption from education legislation and the requirements thereof in certain circumstances. Yet here, particularly in clauses 10 and 11 but also in clause 12, what the Government seek to do is provide a framework within which any educational provision could be made by a corporate entity and not be subject to education legislation. 
 In many ways, that exemption goes far wider than those that have previously been discussed. For obvious reasons, I shall not speak to amendment No. 18, but the same theme applies to it as to amendment No. 19: that the principal purpose of those entities must be educational, not purely corporate and commercial. 
 We seek to establish that a company set up by a school at public expense to provide an educational service must observe education legislation requirements. Where a company operates within a school, the use of facilities for corporate purposes should not be allowed to impinge on the normal expectation of educational activity. 
 Amendments No. 18 and 19 are absolutely central to the Bill. I have not been able to spend sufficient time on this matter to do it justice, and the Minister, in two minutes, will not be able to give an adequate response, but I am anxious to allow him what time there is to reply.

Stephen Timms: Education legislation does not apply directly to companies; it applies to schools, LEAs, colleges and pupils. The amendment would have little, if any, practical effect.
 The misunderstanding may go back to our earlier exchange. Governing bodies will retain their existing duties under education law. Nothing in the Bill sets those aside. Where a company carries out services under contract on behalf of an LEA, the contract will need to impose the same duties and standards on the company as apply to the LEA, ensuring that the LEA fulfils its legal obligations under existing education legislation. 
 Other types of company-companies purchasing goods and services, and PFI companies-carry out commercial functions related to education, rather than directly providing education. In those types of commercial arrangements, education legislation is not relevant and normal company contract and employment law will regulate the companies' activities. Nothing further is needed. It is meaningless to seek to make those companies subject to education legislation. 
 The concern that the hon. Gentleman has expressed is already fully met by existing provisions, including the fact that governing bodies will retain their current duties under the law.

Graham Brady: I am not satisfied by the Minister's statement that the governing body will retain its existing obligation. The company will not-
 It being One o'clock, The Chairman proceeded, pursuant to Sessional Order D and the Order of the Committee [11 and 13 December], to put forthwith the Question already proposed from the Chair. 
 Question put, That the amendment be made:-
The Committee divided: Ayes 5, Noes 12.

Question accordingly negatived. 
 Amendment proposed: No. 59, in page 8, line 32, at end insert 
'(where such refusal cannot be exercised unreasonably)'.-[Mr. Stephen O'Brien.]
 Question put, That the amendment be made:-
The Committee divided: Ayes 6, Noes 11.

Question accordingly negatived. 
 Amendment proposed: No. 18, in page 8, line 32, at end insert- 
'(8) A governing body shall exercise the power conferred by section 10 only if and to the extent that they are satisfied that anything which they propose to do will not to a significant extent interfere with the performance of any duty imposed on them by section 20(2) or by any other provision of the Education Acts.'.-[Mr. Brady.]
 Question put, That the amendment be made:-
The Committee divided: Ayes 5, Noes 12.

Question accordingly negatived. 
 Clause 11 ordered to stand part of the Bill. 
 Clause 12 ordered to stand part of the Bill. 
 It being after One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Four o'clock.